Jacoline Loewen on the three steps to create value

As financial advisors, our focus is on companies in the lower middle market. This typically means companies with annual revenue between $15 million and $75 million. Since the smaller revenues, mean less room to do financial engineering, our strategy for value creation is different.

We, by contrast, base our value-creation strategy on three elements:

1.      leadership development,

2.      enterprise improvement and

3.      growth. 

From our experience, we know that if we accomplish the first two, growth usually results. Even if it doesn’t, such as during the recent recession, significant value can still be created.

Good leaders make good companies. It is not required that our leaders have a long track record of success. We can support them in accomplishing that. What is required is that the leaders possess the personality traits and capabilities that are required to realize the vision of the company. The leadership for the Post Office is different from Apple. For a less extreme example, if the success of a company hinges on continually developing creative, new products, then the leader of that company must possess a personality and leadership style that fosters ideation and creativity. By contrast, such a leader likely would not be effective if they needed to streamline manufacturing processes. Good “fit” of leadership is paramount.

Be sure you have the right team in place. Do a critical and honest analysis of your senior leadership relative to the company’s needs, and adjust accordingly.

If you are the owner and at the center of most activities, this may mean firing yourself.

YIKES!

Owners who realize they are the biggest block to growth and have the ego to hire a CEO will be far more likely to find greater wealth within the next five years.

One of the elements we look for in an investment is the ability to evolve the enterprise. If accomplished, this also will create value without the need for growth. However, when coupled with growth, the value creation is multiplied. Enterprise evolution, typically, is accomplished by harvesting one or more of the following:

Strategic planning. For us, the strategic plan is the cornerstone of enterprise improvement. It is not a just a budget. It sets the management team’s vision.

Sales and marketing. This is an area that often can be improved. In our experience, a majority of lower middle-market companies have not invested sufficiently in this area.

Systems. Often there is an opportunity to evolve an enterprise by improving or replacing systems, including accounting, ERP, oversight, reporting and accountability.

Asset utilization and balance sheet. In lower middle-market companies, there almost always is the ability to improve and create value through better asset utilization and balance sheet focus. This may include using a return on investment framework for capital budgeting, as well as basic items such as improving accounts receivable, accounts payable and inventory turns through focus and technology.

If you are able to accomplish some or all of the leadership development and enterprise improvement initiatives described in this article, you will create value irrespective of business cycles. Even better, you are likely to also create growth.

Jacoline Loewen is a Director of Loewen & Partners Inc., an Exempt Market Dealer, specializing in finance for owner operators and family businesses, specifically acquisitions, restructurings, sales, successions, strategy and private equity financing.

Jacoline began her career with Granduc Mines, Northern BC, and then Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy”. She also wrote "Business e-Volution" and “Money Magnet: How to Attract Investors to Your Business” (Wiley), which has been used by Ivey as a text book.

She is a Director on the Board of the Exempt Market Dealers Association (EMDA) responsible for brand and communications. She is on the advisory board of DCL International, Bilingo China and Flint Business Acceleration. She has been a Director for other Boards such as the Strategic Leadership Forum.

She is a regular panellist on BNN: The Pitch, a contributor to the Globe & Mail and National Post, serves as a judge for the UBC and the Richard Ivey School of Business’ Business Plan Competitions and is a guest lecturer at Ivey and Rotman Universities. Jacoline holds an arts degree in Industrial Relations from McGill University and a MBA from the University of the Witwatersrand.  Her MBA thesis was selected by Cambridge University and published by Cambridge’s Engineering faculty. 

Joe Oliver speaks up for the environment

There is no hope of reasoning with so called environmental groups protesting the pipeline from Alberta to Kitimat.  Joe Oliver is exposing these groups and their malevolent corruption as reported in the Financial Post.
I worked in northern BC for ESSO and Granduc Mines and was grateful that the generous salary that paid for my university and my trips to Acapulco at spring break. These mining companies built good homes, rec centers, schools and  a hospital; they even funded a museum. (My town looked just like Deadwood's set, minus the Gem Salon, but with a more sedate hotel.)
The nature in Northern BC is immense, stretching forever with few humans living there. The mine road, town and mine itself took up little space and now, if you look at Google Earth for Stewart, you will see nature has taken back much of this development. That reversal back to overgrown forest took my lifetime.
So it was crazy to me when people in Toronto would tell me they were against ESSO and Granduc as they were exploiting the land and the people. I could not understand why they would belittle my father's living, mining for the very minerals in their phones and computers. Their words about pollution and strip mining just did not match my reality where I did not see that story line beloved by Greens.
Maybe they were watching too much TV, I do not know.
I do know that at a speech by Enbridge's CEO, a smart man stood up and voiced concern about the wilderness of BC. He had been fishing there and was concerned an oil spill would affect the people's only livelihood. I shook my head because just a few decades ago, the area had employment opportunities for aboriginal people in Granduc. Then the BC government listened to the environmental movements and shut down any mining development, leaving many men of my father's generation to rot away late in their careers.
We need to speak up for politicians like Joe Oliver who have the guts to point out these activists, their sourcing of money (US), the hypocrisy of these Hollywood stars like Cameron who has massive homes and uses energy like a gushing water pipe to make his movies and let us not even add in the energy used by audiences to watch these films. If Darryl Hannah does not like development, go live in Zambia or Zimbabwe. 
In the Financial Post article, there were many comments that agreed with Joe |Oliver and I liked this one:

You can not convince these environmentalist, city dwellers that the Gateway Pipeline is a benefit to Canadians. They are not interested in where we sell our oil, if we create jobs or grow the economy. They do not care if we become a less competitive country with a lower standard of living. They do not care about the significant advances in technology that monitors and prevents spills and other problems with pipeline transportation, the safest mode of oil delivery today. But they fear environmental damage from a pipeline based on partial or unsubstantiated information they have been fed by various sources. 

How do you reason with people who won't listen or learn?

Jacoline Loewen on the defense of Private Equity

At a recent advisory board meeting, one of the Directors made the comment about how the company owner did not want private equity as it would strip the business assets and destroy the employees. I was shocked at this short sighted view, particularly as this very same Director was doing a JV with a German company with a 50% partnership and was familiar with the benefits of working with financial partners.
How did Private Equity get to this position? What happened?

In 1980, approximately $4 billion was invested in private equity in the USA. Today, that number is estimated to be over $600 billion. Canada has followed a similar, but smaller, trajectory.

Many of our great companies and iconic brands were founded with private equity investment and partnering including: RIM, Opentext, IMAX, Skidoo, Four Seasons, Mastermind, Flickr, Apple, Sleep Country, Harveys, Rogers, Cirque duSoleil and Lululemon. Many private equity individuals and firms have generated very large and highly publicized returns on their investments. They have made it the Billionaire's Lists.

The visible, monetary success of private equity was met with some general concern, skepticism and, perhaps, envy from the business community and seeded the pervasive negativity of today. These attitudes were then heightened by the sometimes-questionable and widely publicized practices of mostly American well-known private equity professionals like Michael Milken of Drexel Burnham Lambert, who drove tremendous merger and acquisition activity with junk bonds, T. Boone Pickens generating fortunes with greenmail, and Carl Icahn’s ruthless corporate slashing. 

In Canada, Vengrowth’s Labour Fund rise and fall was not helped by the perception that management had taken a huge fee for themselves, and lived the high life in mansions, while not giving the promised returns. I heard a top journalist lumping all of labour funds and private equity with Vengrowth. 

It is very unfortunate that the journalist put the term “private equity” into a negative business view which flows through to the public’s dialogue. It is hardly surprising then that the bad apples of PE spoil the reputation for private equity that has done very well. Bermingham Construction, Hamilton, was only able to get private equity, not bank finance, and then able to grow to a significant size. This growth would have not happened with bank debt.. 

The public’s concern about private equity was cemented during what Carlyle’s founder, David Rubenstein, called the golden age of private equity, from 2003 to 2007. These years saw unprecedented levels of investment activity, investor commitments, debt deployment and the formation and growth of thousands of private firms and companies that support their investing. During that period, 13 of the 15 largest buyouts in history occurred, and three of the largest private equity firms went public, creating tremendous wealth for their general partners. 

During the golden age, many owners of small- and middle-market companies, and much of the public, started considering private equity investors to be greedy abusers of debt, willing to do whatever is necessary to generate a quick return, even to a company’s detriment. Unfortunately, that perception was not unfounded. Fortunately, there are many great private equity firms that do not operate that way.

Private equity is like many industries (and political parties) where a highly visible portion sets the public’s perception of the whole. There are, in fact, many private equity firms that don’t fit the stereotype, and they can be great partners to business owners and management teams.

Reputable private equity firms focus on creating returns though growth and improvement of the companies they invest in. They develop transaction structures that align their needs with those of the selling parties, as well as the company and its employees. They use appropriate leverage. They develop well thought out incentive plans for company leadership and employees. They support management in developing and executing a strategic plan that will satisfy stakeholder expectations and realize the company’s full potential. They bring resources to bear that the ownership and management wouldn’t otherwise have access to. Finally, they are valuable sounding boards and guides. 

They add value.

Don’t assume all private equity firms — or corporate finance advisers for that matter — are the same. If you are considering a transaction, talk to an exempt market dealer, like Loewen and Partners to point you towards those private equity partners with the track record and who make great partners. They definitely exist.

Banks leave their debt business to the ABLs

The Banks are turning more to low risk business, quite understandably so. Wealth management will be the big winners over the next five years. The question will be what happens to private equity if the banks will not be as accessible with debt lending?
Some experts are saying the golden age of private equity is over because of the decline in bank interest in lending.
Over the past few years, we have seen that banking is getting eroded by - you guessed it - private equity in the ABL business model design. What ABL does is do asset-based lending which is what banks used to very well but it takes up too much time to manage the risk assessment. Remember, the big banks have moved beyond that tailor customizing the suit for the quirks and foibles of the one entrepreneur. Big banks are mass manufacturers of financial loans. The riskier business owners have had to look elsewhere for loans that are more expensive than the banks, but will fill the gap to serve that larger client.
Canada's ABLs have been having a bumper couple of years as they bring their customized loans forward to serve Canadian businesses needing financial support. From my experience with the ABL business, it is a good alternative to banks and the people working with the business owners are far more mature than the bank employees. I also give the ABL industry a huge round of applause for making Canadian businesses more competitive by shoring up worthy companies when the banks would not. Again - the banks are right as these are higher risk loans.
Europe is in a far worse situation than Canada and Danial Shafer at FT points out GE's growth as PE struggles to find loans to help them fund their activities because the banks have shrunk their debt business.

Private equity groups in Europe are increasingly turning towards asset-backed loans as they look to fill the financing gap left by retrenching banks.GE Capital, one of the largest pan-European providers of such loans, is forecasting a wave of asset-based lending deals in 2012 after this year saw such financing becoming more attractive to buy-out groups.The lending arm of US conglomerate General Electric said financing facilities given to private equity backed mid-market companies had shot up to $1.3bn in 2011 from almost zero in the year before.Stephan Caron, chief commercial officer in the UK, said he expected asset-backed lending to grow further next year as GE Capital’s pipeline of deals had approached the size of this year’s financing facilities.

Roger Martin on 2 Lessons About Innovation

My innovative clients tend to take other technologies and combine them in new ways to give clients something useful.  The companies that get beyond the start-up and owner stage tend to put their clients in the middle of their business, not their technology. Even though many of these companies are developed by scientific geeks, they understand how to sell. That is innovation - building a technology that goes beyond your client expectations.
Roger Martin does a Competitive report on Canada every year and with his deep background working with business owners, CEOs of corporations and MBA students, he knows how innovation works. His article in the Globe and Mail captures the critical points about innovation:

Innovation, on the other hand, entails starting with users, obsessing about their experience, and being dedicated to creating unique improvements to it that delight them, even if they never asked for or expect them. Xerox PARC invented the mouse, Bill Buxton and others invented the touch screen, and Research In Motion Ltd. invented the smartphone; all inventions that Mr. Jobs cobbled together to make the Macintosh, iPod, iPhone and iPad. But they were cobbled together in the most magical ways with the user, rather than the scientist, at the centre of the picture.

The second lesson is that successful innovation actually means trying things that are unproven – optimally that have never been tried before. Apple’s biggest successes derived from doing positively unproven things – like controlling a PC with a mouse, like twinning iPod with iTunes, like twinning iPhone with the App Store, like creating the tablet. Apple couldn’t analyze and benchmark the success of somebody else who had done these things already to demonstrate that the idea would succeed. 

Read more.

Profit is the score card for Business

Deepak Choprah says that business should not be about profit only - well, duh! 
To be fair, it was a simple question posted by Diane Nice on the Globe and Mail's LinkedIn Group. 
I find this type of comment irritating for business owners who are fallible human beings. They have enormous pressure from their family and also their employees which is rarely recognized or appreciated, it seems. Naturally, they need to be about profit. Why mortgage your house? Why work long hours? Sure, they enjoy their product but there also has to be a pay off. 
Owning a business and trying to mobilize others to achieve a vision is very, very hard. People like Steve Jobs and the heroes running small companies, are rarely for the profit only. It just will not sustain the business going forward if your only goal is profit.


Where Profit fits into Strategy


Profit is the blood to keep the body going, but every strong business also has a purpose which - to continue the image of the body - is about what you are going to do with that body, where you will take it and how to make an impact on the world. Darn right your vision must have a defined financial hurdle to meet. Without profit, you are out of business. Dead. Kaput.
When I worked as a corporate strategist to a growing bank, part of the Vision was  the ROI of 21%, high for today. Some employees mentioned they did not like the financial benchmark being part of the vision as it seemed to give a whiff od money and greed. Yet this target stated so boldly did drive growth and the bank became the fastest growing company and is now international and still doing well. 
Likewise, Entrepreneurs who are creating a product, and having to meet a payroll, experience pressure cooker pressure to keep their business afloat, never mind growing. This level of effort required too often goes without comment by the anti-business groups. If these businesses do not have a profit, bam - their bank manager will close them down. Game over. The consequences are huge because the business owner is very aware of their responsibility to employees and their families.
We have been seeing the American Government trying to step into the entrepreneur space and actually participate. The US government officials giving the push for loans to green companies like the disastrous Solyndra start-up, are finding out that failure is more often the result than success with business. Since Solyndra was green though, does it justify not checking that profits would be in the cards before the half a billion dollars got spent? The goal of being environmentally green is a better goal to putting profits at the top of the list?
The US Government is finding out how hard it is to make a product, find the market and sell it for a profit, not a loss. The case of Solyndra certainly screams what happens if the profit goal is not at the top of the strategy. This was a green solar panel manufacturer given half a billion dollars as start-up capital by the American government. To put this in context, our Canadian government does not have that much in any, probably in all funds to help Canadian business owners. 
Second, Private Equity would not loan that amount to any start-up. If Private Equity did partner with Solyndra, it would give money in tranches of ten to fifty million, not the whole cash bonanza in one payout period. It is truly shocking to US Private Equity to hear about this story. It smacks of Crony Capitalism and how the system is getting rigged. The Government does not have skin in the game; they are playing with other people's money (tax payers) and the sheer size of their loans boogles the mind. Who was making the decisions? Who made money? Who would be financially driven to make the solar business find paying customers?
Business owners put their blood into their companies. Pundits, like Deepak Choprah, need to recognize the challenge to get things done and to make any change. Business that is out for profit will not keep going. 


Profit is the score card. The Government is finding out that the score card does not get improved by throwing wads of cash at a beginner business, no matter how much you loan to them or how noble the goal. The Private Equity investors will want to know about profit goals first and foremest. They will ask"

Can you make a profit, how soon and when can I get my money back with how much profit?

Deepak may find these mean questions to ask but without the profits, there is no business. No blood, no body to move around.
As a quick aside, I enjoyed this insight from an anonymous comment on the topic of private versus public ability to achieve innovation. Business must focus on profits, even if the US government does not have that pressure:

The somewhat free market produced innovation of the electronic book reader that reduces the energy and waste in the production process of paper books and articles is superior in "Greeness" to just about any innovation in the subsidized electric car programs of the Government-Selected Business consortium.

Run your company as if you are preparing to sell it

When I worked as a strategist for a bank and wrote the speeches for the CEO, who was also the founder, he would confuse me with his insistence on always bringing up complacency. As a young MBA with my career before me, I could not see wasting time on such a mundane topic which seemed more of a downer and something your mother would say. 

As I look back, I realize he was wise with his observation that success brings complacency and complacency brings failure.

Lesson from the recession: Run your company during boom times as if times were lean.

We have heard many leaders bemoaning that their companies would be far more successful if they had run them during the boom period as they are running them now. Without question, success can bring complacency. However, the best leaders we know resist this tendency. Their companies’ cultures foster continuous improvement and cost-reduction regardless of great performance.

Similarly, the advice we often give entrepreneurial and family business owners is, “Run your company as if you are preparing to sell it in three years.” This means eliminating underperforming employees (which can be difficult, even when done with great care and consideration, but is critical), and building cost-cutting and improvement initiatives. These efforts will grow EBITDA and result in a more successful, resilient and valuable company.

As for my old boss, his bank is still in business, having survived the derivatives madness, and has achieved its vision to be global. Complacency is indeed the key word to put in all your leadership speeches.

Jacoline Loewen is a Director of Loewen & Partners Inc., an Exempt Market Dealer, specializing in finance for owner operators and family businesses, specifically acquisitions, restructurings, sales, successions, strategy and private equity financing.

Jacoline began her career with Granduc Mines, Northern BC, and then Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy”. She also wrote "Business e-Volution" and “Money Magnet: How to Attract Investors to Your Business” (Wiley), which has been used by Ivey as a text book.

She is a Director on the Board of the Exempt Market Dealers Association (EMDA) responsible for brand and communications. She is on the advisory board of DCL International, Bilingo China and Flint Business Acceleration. She has been a Director for other Boards such as the Strategic Leadership Forum.

She is a regular panellist on BNN: The Pitch, a contributor to the Globe & Mail and National Post, serves as a judge for the UBC and the Richard Ivey School of Business’ Business Plan Competitions and is a guest lecturer at Ivey and Rotman Universities. Jacoline holds an arts degree in Industrial Relations from McGill University and a MBA from the University of the Witwatersrand.  Her MBA thesis was selected by Cambridge University and published by Cambridge’s Engineering faculty. 

Catch your employees doing something right and boost productivity

Kindness at work goes much further than the stick, although in these stressful times, the stick can be the quick option. Quick is not always the best option.

Just as in health care, the hidden impact of touch and care can speed up healing, so can attention at work improve motivation. I have been following the career of the CEO of Campbell Soup, Doug Conant, who has been an exceptional leader. When I read his quick snapshot on three rules for building appreciation I was reminded of my research findings from my Masters' thesis which was on Deming and his rules for building a total quality culture within a company. The managers I surveyed gave "opportunity to celebrate" as the most important step to build a quality mindset, yet it was the step they did not do.

Doug Conant mentions celebration as his second rule for building appreciation and it reminded me that most managers find this hard to do. Doug's success as a leader is obviously about paying attention to the high touch part of business. 


Doug Conant, Campbell Soup, and his 3 Rules for Building Appreciation:

Make a personal connection early on
"Your associates can tell when you are being direct, sincere and authentic. When you are, you establish trust. When you aren't, you don't. I have developed a practice that helps get things out in the open the moment a new hire meets me — I declare myself. I tell the person I'm meeting about my background, my values, my leadership philosophy, my expectations and even my favorite quotes. I then ask him or her to share something with me. My goal is to take the mystery out of our relationship as quickly as possible. This has proved to be a very powerful tool for relationship-building."
Look for opportunities to celebrate
Doug says, "My executive assistants and I spend a good 30 to 60 minutes a day scanning my mail and our internal website looking for news of people who have made a difference at Campbell's. For example, as of this writing I just learned about a woman named Patti who just got promoted in our customer service area, so I made a note to congratulate her."
Get out your pen
.Doug says, "Believe it or not, I have sent roughly 30,000 handwritten notes to employees like Patti over the last decade, from maintenance people to senior executives. I let them know that I am personally paying attention and celebrating their accomplishments. (I send handwritten notes too because well over half of our associates don't use a computer). I also jump on any opportunities to write to people who partner with our company any time I meet with them. It's the least you can do for people who do things to help your company and industry. On the face of it, writing handwritten notes may seem like a waste of time. But in my experience, they build goodwill and lead to higher productivity."

Andrew Bell helps me figure out my question for 2012 on BNN The Pitch

Throwing his usual curve ball while on live TV, Andrew Bell asked me if business in Canada was being buried by government regulation.
Since I am on the board of the Exempt Market Dealers which seeks to regulate Loewen and Partners role as corporate finance adviser to business owners, I do accept some government regulation from the Securities Commission.
What is the role of government though in helping our industries outside of the oil and mining circles?
The cost of government is nearly getting to where tax payhttp://www.bnn.ca/Shows/The-Pitch.aspxers must work until August. It is a great deal to tax in order to pay to keep our regulations and government systems running. That is where I question the removal of money from the people creating jobs and money for the communities around their business. What is the opportunity cost of that transfer of money?
What can government do to help business in Canada get stronger?
That will be my question for the year 2012.

The Pitch gives marketplace for businesses wanting growth

The marketplace of ideas is what gets our engines running, or my engine gets a rev from others. This year, for sheer engine power, my favourite TV show is BNN The Pitch.  Andrew Bell is the wonderfully curious host and for the past year I have been part of the pane that interviews the two company owners seeking capital.
Here are the details from today's The Pitch show.

Stephanie McLarty, President & CEO, REfficient

www.REfficient.com

Stephanie McLarty, President & CEO, REfficient, has a way for businesses to sell surplus technology equipment to others. Her large clients generate between $50,000-$200,000 net proceeds from the process and divert 30-50 tonnes from landfills.

Christopher Serrie, CEO & Managing Partner, Building Water Solutions

www.buildingwatersolutions.com

Christopher Serrie, CEO & Managing Partner, Building Water Solutions, has already signed a deal with Canada's largest home builder to provide a special water filtration system for high rise condo buildings and is looking to expand.

Panelists:

Rick McGraw – President and CEO of Greenrock Asset Management

Sarah Prevette – Founder, Sprouter.com

Jacoline Loewen - Loewen Partners, Private Equity, author of Money Magnet.